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Frugaling is fast approaching its third anniversary. Three years of articles, debates, conversations, comments, and millions of visitors. It’s been a humbling journey, but I’ve struggled with a concept at the center of my writing: “personal finance.”

The term grew in popularity in the early 1900s. It was primarily deployed and embraced by the middle classes of America. To scrimp and save was seen as virtuous. You could take nicer vacations, save for retirement, or give more to charity by budgeting better. Undoubtedly, all good things.

“Personal finance” has allowed many to live a fuller life, but also placed much of the burden and responsibility on individuals. Unfortunately, little has changed in nearly 100 years of regular use. Amidst record breaking income and wealth inequality, we seem frozen in time — continuing the use of this term without reservation or thought.

We must ask ourselves some questions about financial education and planning: Are people able to scrimp and save like years prior? Does personal finance capture the economic hardship many face? Is this the best advice we can offer after 100+ years of collective financial experience?

The answer is no, no, and no.

When I break from the 100-year-old script of personal finance and call out the tragedy of income and wealth disparities, people tend to invoke the personal responsibility argument. In response, I receive comments and emails from devout readers who balk at my hesitation to call out financial errs and place more emphasis on society. They tend to ask, What’s the point of saving and making more money if people aren’t personally responsible? They suggest that finances are personal and failure is on the individual.

Over time, I’ve grown increasingly more resistant to the term. For the oppressed, try as they might, their budgets do not add up. They must seek social assistance or face dire consequences (i.e., hunger, eviction, and homelessness).

Whether we know it, prefer it, or like it, personal finance alludes to personal responsibility for errors and successes.

Fail? It’s your fault.

Succeed? It’s your smarts.

Can’t we do better than these oversimplified, overused assumptions? Fortunately, we have an opportunity to approach finance in a new way. It starts with a reinvention of terms. As inequality has worsened, the term has become antiquated and inaccurate. We need to shift to something more appropriate, which captures the diversity of responsibility.

Today I propose we seek a new term and call it: “social finance.” Whereas personal finance places the burden solely on the individual, social finance highlights the environmental, societal, and governmental consequences to an individual.

With social finance, we understand that budgeting will be more difficult for African American men than White guys like me. Why? Because I was afforded great privilege. For instance, one-third of African American men will go to prison in their lifetime. Word to the wise: it’s not because black men are more predisposed to crime than white men.

With social finance, we understand that making money will be more difficult for women than White guys like me. Why? Because I continually earn more than women; not because I work harder, but because society pays women 64% of what I make as a man.

With social finance, we understand that intellectual and physical disabilities affect earning potential — not temporarily-abled White guys like me. Why? Because persons with disabilities are prejudicially fired, refused work opportunities, and the first to lose their jobs to automation and outsourcing.

Personal finance fits well within Western culture. We value hard work, ethic, and personal responsibility above all else. The idea of social finance will be challenging for many, but I believe we can do it. What do you think?

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Photo: LendingMemo

Over the last few months, I developed plans to minimize my tax bill, earn more money, and invest in the stock market. Much of this financial planning is motivated by an upcoming tax burden that’s sure to sting.

The problem starts with self-employed earnings. These are filed under Schedule C of the U.S. tax code. Unfortunately, those earnings don’t include withheld funds that support Medicare and Social Security. To account for this, the federal government requests about 30% in self-employment taxes.

As someone who’s funneled as much cash as possible to swiftly pay off student loans, I don’t necessarily have a lot of liquidity or extra funds to pay this tax bill (yet). The U.S. government doesn’t adequately account for someone paying off student loans when asking for the tax bill at the end of the year (and this is just the tip of the iceberg for financial aid concerns).

With these worries in mind, I took time today to restrict my spending ability, increase my regular income, and provide a bit of a tax shelter. And it all starts with dividends.

One of the most contentious elements in our tax code has to do with capital gains and dividend taxes. Whereas normal income from work is taxed at steep, progressive rates, these stock-affiliated earnings receive an artificial discount. If you make over $406,750 as a single person, you pay only a 20% tax on dividend earnings. And if you hold stocks/assets for over one year, you also qualify for this reduced rate.

Only 20% of qualified dividends and long-term capital gains are taxed for those making over $406,750 per year.

For me, as a single filer with projected earnings of less than $36,900 for 2014, I’m looking at a brilliant tax rate of 0%! You heard me right: zero percent! That means for every stock that I hold onto for over one year or qualified dividend I receive, I should be able to keep the entirety of that income. Here’s where nifty financial planning will help lower my tax burden and increase the money in my pocket.

Today, I made a small (large for me, though) investment in Apple Inc. (AAPL). The stock is currently valued at $95.25, as of August 5, 2014. At that value, it is hardly one of the greatest income earners, but it pays a substantial 2% dividend yield. Simultaneously, Apple is still highly favorable among stock analysts — Yahoo Finance suggests that the collective price target is $104.79 within 1 year.

Based on stagnant yield growth, I should make about $31.96 per year from dividends. That’s all income that should receive a 0% tax due to those gains. Based on about a 10% (possible) appreciation in Apple for one year, any gains will be completely protected from taxation — even after I sell the stock. I will again have the 0% tax liability.

This is the benefit! I’ll be paying nothing via qualified dividends and long-term capital gains taxes!

The political climate around changing capital gains taxes is terrible. The regulations should change — they need to stop benefiting the wealthy. Warren Buffett has frequently complained about this tax code inconsistency, and suggested that it unfairly rewards the wealthy. I think he knows a thing or two about investing, too! Until then, and as a low-income earner, I need to use this system to my advantage to reduce my tax liability and increase earnings.

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The spoils of income inequality

On July 13, 2012, a Tumblr blog by the name of “Rich Kids of Instagram” started sharing public Instagram photos from the rich and sometimes famous. Every picture showed how the wealthiest enjoyed spending their money and the many adventures brought on by the good ol’ American dream. The site’s popularity spawned a reality TV show called, “Rich Kids of Beverly Hills.”

When I first saw photos from “Rich Kids” — driving in their brand new Ferraris and drinking Dom Perignon through glass AK-47s — I got mad.

“Look at how much money they spend on themselves, when there’s poverty, starvation, and war,” I thought.

We are talking about kids that grow up with American Express Centurion (“Black”) Cards and know that their parents have a total net worth in the hundreds of millions or billions of dollars. They spend money without care — because they needn’t have one. Their money is safe for many generations to come. This excess and desire for luxury goods and travel is nothing more than a symptom of years of compounded income inequality. And a select group are getting really rich in the process.

The takeaways:

Buy a fast car

Drink expensive liquor

Make sure everyone around you is beautiful and knows you’re rich

Your stock portfolio and plutocracy

In 2005, I was in the middle of high school — loathing every minute of it. I never read. I didn’t get along with most of my teachers. I was mister average. I don’t think most of my teachers would remember me. The only thing that seemed to set me apart was a fervent inclination towards the stock market.

My interest developed after my late grandfather had bestowed a couple classic stocks to our family. I tracked these stocks religiously and would constantly check the newspaper for stock market updates. I remember depositing money into an investment account. I needed my parent’s custodial permission. Underage, I wasn’t supposed to trade alone, but I did. I constantly had to lie to brokers for trades to go through (“Yes, I’m Mr. Adult Lustgarten, and I’m the owner of this account…”). Commissions ate up my profits, but I loved every minute of it.

Part 1 of Citigroup’s Plutonomy papers, which explained why investors should look to luxury brands for future profits.

Later that year I was exposed to the single-greatest financial paper I’d ever read. It was authored by three Citigroup employees: Ajay Kapur, Niall Macleod, and Narendra Singh. Only 16 years old, you couldn’t pay me to read The Odyssey or my European History textbook, but here I was passionately reading a paper entitled, Plutonomy: Buying Luxury, Explaining Global Imbalances. I was a total weirdo.

Basically, plutonomy is a fancy word for saying that a select few wield a disproportionate amount of influence and power over the economy. As the authors pointed out, “Plutonomies have occurred before in the sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the U.S.” They posited that this was happening again.

“We project that the plutonomies (the U.S., UK, and Canada) will likely see even moreincome inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization [emphasis added].”

The authors argued that, “The World is dividing into two blocs — the Plutonomy and the rest.” They stated that the rich were getting richer and that had deep consequences to consumption. Effectively, the rich would make up “a disproportionate chunk of the economy.”

The authors’ premise was that investors could predict profitable companies based on their target audiences. For example, a wise investor — when accounting for greater plutocracy and income inequality — would be able to make more money in companies that catered to the rich.

The takeaways:

Accept that income inequality exists and is growing — do nothing

Learn how to make money from it

Invest in companies that cater to the wealthy (i.e., Citizen, Coach, LVMH, etc.), while the middle class disappears

Economists have long created mathematical formulas to predict financial events, but Piketty found that these methods were inherently flawed. Piketty explained that much of economics deals in a hyper-theoretical world, which is removed from history and doesn’t account for individual actors. For him, this was an opportunity to make economics a truer social science — blending sociology, psychology, history, and economics into one tome.

“For far too long, economists have neglected the distribution of wealth, partly because of Kuznets’s optimistic conclusions and partly because of the profession’s undue enthusiasm for simplistic mathematical models based on so-called representative agents.”
–Thomas Piketty

Capital is just another exclamation point in a long list of those calling for income inequality action — across political parties and professions. As noted, even financial analysts acknowledge plutocracy and income inequality when the differences can be exploited for extra profit.

Now that Piketty’s book is atop much of the world’s bestseller lists, it is attracting a growing number of critics.

With patronizing polarity, Forbes’s Avik Roy wrote, “The American Left has worked itself into another one of its frenzies about income inequality.” After a cursory glance at Piketty’s Capital principles, Roy taunted readers by saying, “Is it really so great to live in a country where everyone is equally poor?” Unfortunately, this appeal to consequences is but a mere distraction from the content and character of the book’s concerns. Of course we don’t want to live a world that’s equally poor — Piketty never advocated for this dystopian, communist world.

Roy’s argument is partisan and illogical, but more evidence-based concerns have risen since then. The Financial Times issued a scathing critique of the book. The author, Chris Giles, says,

I discovered that his estimates of wealth inequality – the centrepiece of Capital in the 21st Century – are undercut by a series of problems and errors. Some issues concern sourcing and definitional problems. Some numbers appear simply to be constructed out of thin air.

These discrepancies between what Giles calculated from Piketty’s data led him to report that Capital’s biggest fault is in reporting greater than expected income inequality in Britain. Giles contends that Piketty “cherry-picked data” to make it seem worse.

As any ethical professor and scholar would do, Piketty tailored a response to these claims. His rebuke suggests that he made adjustments to data because statistics and economics is highly variable and interpretable. Essentially, The Financial Times calculated differences in their models because they chose different measures of estimation; even then, there was still growing income inequality.

Meanwhile, The Guardian wrote, “This is a huge book, more than 700 pages long, dense with footnotes, graphs and mathematical formulae. At first sight it is unashamedly an academic tome and seems both daunting and incomprehensible [emphasis added].” Well, I just spent an inordinate amount of time reading his masterpiece, and have quickly placed every lesson in the following article. I’ve tried to link to further explanations, should you care to spend the time.